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2/9/2005
Round Number in Debt, by George Zachar
The big round number in US debt markets
these days is 4.00% on the ten year treasury:
a strike in OTC options, a potential inflection
point for rebalancing mortgage portfolios, a
psychological barrier inducing sticker shock,
etc. etc.
Well, not only did we close through 4% today
(humble gif attached), but the street will be
bidding on $14 billion of these things tomorrow.
George adds:
Street debt research departments are
busily cranking out explanations for
(yet another) unexpected decline in
10 year note yields.
Mr.E, as usual, was ahead of the curve
in steering folks to structural issues
related to price insensitive demand.
Disclosure: I actually bought bond
futures a few weeks ago, but spread
them against the wrong thing, and
managed to lose money on the trade.
Following is a set of questions related
to my post, which the chair forwarded.
(1) What happens when mortgage portfolios are rebalanced?
In the current situation, that means folks have to
buy long dated fixed coupon (style) paper to keep
their durations fixed as mortgages prepay.
(2) What happens when $17B hits the ten year note?
I assume this refers to the $14 10 year auction
at 1pm today. There's a lot of cut-and-thrust
hand-to-hand gamesmanship in the auction process
that is invisible outside the tiny world of
big dealer desks, super-size accounts, and
related ramora.
What's interesting is the auction result detail,
and the market reaction thereto, which become
visible for all to see, between 1:01 and 1:10 pm.
My long-standing contention is that auction dynamics
and their immediate wake only illuminate short-term
market technicals, not "the big picture".
(3) Auction announcements occur at 1PM EST, does the trade
have 'inside'information?
Yes.
4) Is a move after the yield awarded is announced simply an
adjustment toward the fact, or is there an additional expectation added?
Auctions are like unhappy families. Each one is different.
